2024 (7) TMI 635 - AT - Income Tax

Nature of receipts - receipt of non compete fees - capital receipt or revenue receipt - HELD THAT - The consideration received by the assessee towards non compete fee is capital in nature , as it is already held that the amendment to section 28(va) of the Act is not applicable to the year under consideration. The intention of the legislature was to clear the ambiguity of the non compete fee received by the assessee by treating the same as a revenue receipt in the hands of the assessee but only post amendment, i.e., w.e.f 01.04.2003. It is trite to reproduce section 28(va) of the Act for ease of reference herein under We, therefore, find no infirmity in the order of the ld. CIT(A) in holding the non compete fee to be in the nature of a capital receipt for the year under consideration. The issue pertaining to the period of the said agreement also becomes irrelevant for the fact that the assessee would be liable to tax on non compete fee as revenue receipt from A.Y. 2004 2005 as per section 28(va) of the Act. Appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Whether the non-compete fees of Rs. 10 crores should be treated as capital or revenue receipt.
2. Whether the amendment to section 28(va) of the Act applies to the non-compete fee received prior to the relevant period.

Analysis:
1. The Revenue challenged the order of the CIT(A) regarding the treatment of non-compete fees as capital receipt. The Revenue contended that the non-compete fee of Rs. 10 crores should be considered a revenue receipt as it did not restrict the assessee's source of income. The Revenue relied on the AO's order and argued that the fee was taxable in the hands of the assessee. However, the AR for the assessee argued that the fee should be taxed as a revenue receipt only from A.Y. 2003-04 onwards, citing previous decisions supporting their stance.

2. The Tribunal observed that the assessee received various sums from a joint venture company, including the non-compete fee. The Tribunal noted that the agreement restricted the assessee from marketing certain products until holding a specific percentage of the joint venture's capital. The AO considered this restriction not absolute, allowing the assessee to compete if its shareholding fell below 26%. The CIT(A) relied on the Supreme Court's decision in Guffic Chems Pvt. Ltd. and the amendment to section 28(va) of the Act, effective from A.Y. 2003-04, to treat the fee as a capital receipt.

3. The Tribunal analyzed the agreement and relevant legal precedents, emphasizing that the non-compete fee was part of a negative covenant restricting the assessee's business activities. Referring to the Apex Court's decision in Guffic Chems Pvt. Ltd., the Tribunal concluded that the amendment to section 28(va) did not apply retrospectively. Therefore, the non-compete fee was deemed a capital receipt for the relevant year. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order.

In conclusion, the Tribunal affirmed that the non-compete fee of Rs. 10 crores should be treated as a capital receipt for the year in question, as per the provisions of the Act and relevant legal interpretations.